As an important infrastructure of the cryptocurrency ecosystem, Ethereum has been carrying the deployment of a large number of applications. Due to the transaction congestion and high gas fees of the Ethereum network, its "impossible triangle" problem has become increasingly prominent. Against this background, Layer 2 expansion solutions came into being to solve the performance bottleneck of Ethereum. These Layer 2 solutions have received great attention from the capital market during the bear market in 2022 and 2023, and have successively obtained large amounts of financing.
This has led to a strong smell of capital in the Ethereum Layer 2 field, which has become an emerging track that has attracted widespread attention and expectations since the beginning of the bull market. Some projects have even reached a high market value of $1 billion as soon as they went online. However, since April 2023, many L2 projects have suffered the fate of a bubble burst - from a sharp drop in prices to intensified conflicts between founders and the community, the myth of L2 seems to be dissipating. At the same time, the rise of fully circulated tokens represented by the Meme sector indicates that the direction of the cryptocurrency market is undergoing subtle changes.
The impact of the popularity of Meme coins on L2
Compared with L2 projects, the fully circulated tokens represented by Meme coins are more popular in this bull market. Investors prefer tokens with high liquidity and enthusiastic communities, and are less interested in "VC tokens" that have received large amounts of financing but have been slow to realize their value. This trend has put some pressure on the development of L2 projects, forcing them to rethink their positioning and value propositions. From the launch to now, the Meme token sector has performed well. Representative projects such as SHIB, DOGE, PEPE, BONK, FLOKI, etc., experienced a round of wash-out after logging on to the Binance exchange, and then showed an increase ranging from 5 to 20 times. Among them, the increase of PEPE and FLOKI is as high as 10-20 times, second only to the leader of the increase, Inscription Audi.
In contrast, the highest increase of Ethereum Layer 2 expansion project after listing on Binance is only 2-3 times. This highlights the strong performance of Meme tokens in the current bull market, becoming the most watched highlight of the increase after Inscription Audi.
Layer 2 projects suffer setbacks: ample financing, poor prices
Layer 2 star projects generally have sufficient financing, but their price performance is poor. Represented by Arbitrum, Optimism and Starknet, these Layer 2 projects raised 143 million, 430 million and 258 million US dollars respectively, and their market value after going online reached 2.7 billion, 2.6 billion and 728 million US dollars respectively, and the locked value (TVL) continued to increase. However, surprisingly, the prices of these highly anticipated "luxury" Layer 2 projects have shown a downward trend and received a lot of negative comments.
At the same time, these Layer 2 project tokens that have received huge financing have been labeled as "VC tokens" in the current cryptocurrency bull market. This type of "VC token" usually has the characteristics of low circulation, high market value, and large listed exchanges. In addition to the current number of actual circulating tokens, there are a large number of tokens in the linear unlocking stage, which will be gradually released in the future. Compared with the full circulation of MEME and inscription tokens before, retail investors seem to be relatively less interested in this type of "VC tokens", resulting in the current Layer 2 market. The sentiment of not taking over each other has spread. On the contrary, the fully circulated MEME tokens are more popular in the current market.
Layer 2 projects encounter the dilemma of "anti-take-back"
Let’s first look at two recent L2 projects that have issued tokens. Taiko is a decentralized Ethereum equivalent (Type-1) ZK-VM and general ZK-Rollup second-layer network led by Sequoia China and Generative Ventures, raising $22 million. Taiko performed poorly in terms of public airdrop rules. The founder responded to questions with a blunt attitude, saying "People who don’t like it can leave. The rules are not transparent because transparency cannot resolve differences." This official attitude has caused dissatisfaction among many users.
Another highly-watched Layer 2 project, ZKSync, has also encountered the dilemma of "anti-slip". ZKSync once raised huge amounts of funds and had a super-high valuation, and a large number of users have participated in its ecological construction since 4 years ago. However, the airdrop qualification standards recently announced by ZKSync have been strongly questioned, and it has been accused of serious problems with user classification and mistaken killing of retail investors. In this regard, the official response of ZKSync was very simple and crude, saying that "all decisions related to airdrop allocation are made by the ZKsync Association at its own discretion." This lack of communication and explanation has aroused the anger of KOLs and retail investors, and even attracted criticism from Justin Sun, which may lead to the obstruction of ZKSync's listing.
Adverse impact on the entire Layer 2 ecosystem
For retail investors, the project's opaque operation and high-pressure attitude will make them lose confidence in the project, which will in turn affect the development of other ecological projects on the chain. Without widespread retail investor participation, it is difficult for the Layer 2 ecosystem to form a virtuous closed loop.
For the project owners, the project's reputation will be damaged, users and developers may be lost in large numbers, and the prospects for ecological development will be worrying.
For investors, these issues will directly affect the project's rate of return. Since the VC's tokens are unlocked linearly, if the ecosystem is damaged, the VC's final returns will also be eroded. Investors may be more inclined to choose projects with better credibility.
In general, the "anti-slip" dilemma of Taiko and ZKSync has exposed the pain points of Layer 2 projects in terms of token distribution and ecological construction, and has brought adverse effects to the entire Layer 2 ecosystem. Project parties need to reflect on their own problems and improve communication with users to stabilize the sustainable development of the Layer 2 ecosystem.
Ethereum’s current market position and influence
In the current bull market of cryptocurrency, Ethereum's performance is slightly weaker than Bitcoin and some altcoins. Data analysis shows that since the bull market started in June-July last year, as of June 14, 2024, the price of Ethereum has risen from $1,763 to $3,514, an increase of about 199%. In contrast, Bitcoin rose by about 300% during the same period, and Solana rose by 423%, and Ethereum's increase was slightly inferior.
However, despite lagging slightly behind in terms of growth, Ethereum still maintains its core position in the cryptocurrency market. Ethereum is the second cryptocurrency to successfully apply for an ETF after Bitcoin, which further consolidates its position among institutional investors. In addition, according to Deflama data, Ethereum's current total locked value (TVL) is approximately US$62.8 billion, which fully demonstrates Ethereum's dominant position and influence in the DeFi ecosystem.
In general, in the current bull market, Ethereum has performed steadily, with neither a sharp rise nor a sharp correction. With the continuous advancement of the Ethereum 2.0 technology roadmap, Ethereum's technical strength and ecological construction will be further enhanced. We have reason to believe that Ethereum will continue to play an important role in the development of the future cryptocurrency market and become one of the focuses of investors' attention.
Ethereum ETF’s potential for reversal after official listing
According to the latest news, the U.S. Securities and Exchange Commission (SEC) is expected to approve the S 1 application of the Ethereum ETF on a summer day (June 22-September 23), which is one step closer to official listing and trading. In the past, after the approval of the Bitcoin ETF, the rapid inflow of funds led to a sharp rise in the price of Bitcoin. Similarly, the launch of the Ethereum ETF is also expected to become a catalyst for the breakthrough of Ethereum prices. In addition, according to unofficial Bloomberg analysis, the S 1 application of the Ethereum ETF may be approved by the SEC before July 2, which undoubtedly injected strong momentum into the reversal of Ethereum.
Of course, once the price of Ethereum rises sharply due to the ETF funds, the L2 solution and re-pledged tokens in its ecosystem will also be favored by funds, thus achieving a follow-up rise. The official trading of Ethereum ETF undoubtedly brings huge reversal potential to Ethereum and its ecosystem. We have reason to expect that with the listing of Ethereum ETF, Ethereum and its related assets will usher in a new round of price leaps.
